Lifetime allowance changes from 06th April 2023 were announced in the Spring Budget 2023.
Lifetime allowance changes from 6 April 2023 will result in the removal of the lifetime allowance (LTA) charge and we have covered that in further detail here.
The lifetime allowance will be entirely abolished from the 2024 to 2025 tax year, through a future Finance Bill.
This means that from 6 April 2023, the current lifetime allowance framework remains in place and the lifetime allowance for 2023 to 2024 remains at £1,073,100.
Once the lifetime allowance changes take effect, there will be no requirement for pension scheme administrators to report lifetime allowance charges on the Accounting for Tax Return (AFT) for any benefit crystallisation event occurring after 6 April 2023 as no lifetime allowance charge will arise.
Pension commencement lump sum and lifetime allowance protections
As a result of the lifetime allowance changes, the maximum amount most members can take as a pension commencement lump sum will be frozen at £268,275, which is 25% of the current standard lifetime allowance of £1,073,100. However, members with a protected right to a higher pension commencement lump sum on 5 April 2023 will continue to be able to access this right.
All existing rules for calculating a pension commencement lump sum will remain for the 2023 to 2024 tax year.
Members who hold valid enhanced protection or any valid fixed protections will be able to accrue new pension benefits, join new arrangements or transfer without losing this protection provided this protection was applied for before 15 March 2023, and a certificate or reference number subsequently issued, from 6 April 2023. They will also keep their entitlement to a higher pension commencement lump sum and will be able to accrue new pension benefits, join new arrangements or transfer without losing this protection.
If a successful late application is made for enhanced protection or fixed protection on or after 15 March 2023, the member will be entitled to a higher pension commencement lump sum but will be subject to all existing rules for protection cessation events. This means if they have a protection cessation event after 6 April 2023, they will lose their lifetime allowance protection.
Members who have enhanced protection with lump sum protection will still be entitled to a higher pension commencement lump sum, but the value of the lump sum will be limited based on the value of their pension pot on 5 April 2023.
This means that pension scheme administrators will need to be able to provide members with a valuation as at 5 April 2023. Any contributions made on or after 6 April 2023 will not be included for the purposes of calculating their pension commencement lump sum.
Taxable lump sums and PAYE for employers payroll reporting
Lump sum taxation
In certain circumstances, the following payments would currently be subject to a lifetime allowance charge at 55%. From 6 April 2023, once the lifetime allowance changes take effect, this will be replaced with income tax at the recipient’s marginal rate:
- – serious ill-health lump sum
- – lifetime allowance excess lump sum
- – uncrystallised funds lump sum death benefit
- – defined benefits lump sum death benefit
This means that as per the lifetime allowance changes, when operating the lifetime allowance checks on a member, where pension providers identify one of these lump sums, normal PAYE rules will apply to these payments, and they will be treated as pension income.
Further guidance on lifetime allowance changes
Updated GOV.UK guidance for pension scheme members will be published on 6 April 2023.
HMRC will provide further updates on the lifetime allowance changes through future lifetime allowance guidance newsletters, but this guidance will not be reflected on GOV.UK. Once the full changes have been implemented, GOV.UK will be updated in full.
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How can MCL Accountants help?
Contact MCL Accountants on 01702 593 029 if you would like further information about Lifetime Allowance changes or if you need any assistance with the preparation and submission of your business accounts or self-assessment tax returns to HMRC.
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Ishan provides financial management, taxation and transactional advice to business entities of all sizes. His expert areas include statutory compliance, business taxation, personal tax & transactional processing and systems. Industry sectors include professional services, retail, hospitality and entertaining & media and advertising services.